Business Level Strategies: After Studying This Chapter, You Will Be Able To

CHAPTER 5
BUSINESS LEVEL
STRATEGIES
LEARNING OUTCOMES
After studying this chapter, you will be able to:

❑ Identify the Business Level Strategies.
❑ Explain Porter’s Five Forces Model.
❑ Understand the features and suitability of Cost Leadership
Strategy.
❑ Understand the features and suitability of Differentiation
Strategy.
❑ Understand the features and suitability of Focus Strategy.
“If all you’re trying to do is essentially the same thing as your rivals,
then it is unlikely that you’ll be very successful.”
- Michael Porter
“Strategy is a pattern in a stream of decisions.”
Henry Mintzberg
© The Institute of Chartered Accountants of India

5.2 STRATEGIC MANAGEMENT
CHAPTER OVERVIEW
Competitive Analysis (Porter's

Five Forces)
Business Level
Strategies
Best Cost
Michael Porter's Provider
Strategy
Cost Leadership Differentiation

Focus Strategy
Strategy Strategy
5.1 INTRODUCTION
An organization’s core competencies should be focused on satisfying customer
needs or wants in order to achieve organisational objectives. This is achieved
through businesses level strategies. Business level strategies are the course of ac-
tion adopted by an organisation, for each of its businesses separately, to serve
identified customer groups and provide value to those customers by satisfying their
needs. In the process, the organisation uses its competencies to gain, sustain and
enhance its strategic and competitive advantage.

BUSINESS LEVEL STRATEGIES 5.3
5.2 PORTER’S FIVE FORCES MODEL-

COMPETITIVE ANALYSIS
Every business operates in a competitive environment. The competitive state of an
industry has a strong influence on how firms develop their strategies. Michael Por-
ter believed that the basic unit for analysis, is a group of competitors producing
goods or services, that compete directly with each other. Competitive advantage is
industry specific. An organisation attempts to adopt an approach to win over com-
petitors in the same industry.
The character, mix, and intricacies of competitive forces differ from one industry to
another. A powerful and widely used tool for systematically diagnosing the signifi-
cant competitive pressures in a market and assessing the strength and importance
of each of those pressures, is the Porter’s five-forces model of competition. (see
figure) This model holds that, the state of competition in an industry is a composite
of competitive pressures operating in five major areas of the market:
♦ Competitive pressures associated with market maneuvering and jockeying for
buyer patronage that goes on among rival sellers in the industry.
♦ Competitive pressures associated with threat of new entrants in the market.
♦ Competitive pressures coming from attempts of companies in other indus-
tries to win buyers, by offering substitute products.
♦ Competitive pressures stemming from supplier bargaining power and sup-
plier-seller collaborations.
♦ Competitive pressures stemming from buyer bargaining power and seller-
buyer collaborations.
Strategists can use the five-forces model to determine the competitive landscape of
a given industry, by undertaking the following three steps:
Step 1: Identify the specific competitive pressures associated with each of the five
forces.
Step 2: Evaluate the strength of pressure comprising each of the five forces (it
could be fierce, strong, moderate to normal, or weak).
Step 3: Determine whether the collective strength of the five competitive forces is
conducive to earning attractive profits.

Figure: Michael Porter’s Five Forces Model of Competition
Porter’s five forces model is one of the most effective and enduring conceptual
frameworks used to assess the nature of competitive environment and to under-
stand an industry’s structure. The interrelationship amongst these five forces, gives
each industry, its own particular competitive environment. By applying Porter’s five
forces model of industry attractiveness to their own industry, management can
gauge their firm’s strengths, weaknesses, probable threats and future opportuni-
ties.
5.2.1 Threat of New Entrants
New entrants can reduce an industry’s profitability, because they add new produc-
tion capacity, leading to increase in supply of the product, sometimes even at a
lower price and can substantially erode existing firm’s market share position. How-
ever, New entrants are always a powerful source of competition. The new capacity and
product range they bring in throws up a new competitive pressure. The bigger the
new entrant, the more severe the competitive effect. New entrants also place a limit
on prices and affect the profitability of existing players, which is known as Price War.
For example, Reliance Jio offered cheap services when it entered the telecom industry

in 2016, thus limiting the prices for existing players like Airtel, Vodafone, Idea, etcA firm’s
profitability tends to be higher when new firms are blocked from entering the indus-
try. To discourage new entrants, existing firms can try to raise barriers to entry.
“Barriers to entry" represent economic forces (or ‘hurdles’) that slow down or im-
pede entry of new firms. Common barriers to entry include:
(i) Capital requirements
(ii) Economies of scale
(iii) Product differentiation
(iv) Switching costs
(v) Brand identity
(vi) Access to distribution channels
(vii) Possibility of aggressive retaliation by existing players
(i) Capital Requirements: When a large amount of capital is required to enter
an industry, firms lacking funds are effectively barred from that industry, thus,
enhancing the profitability of existing firms. For example, huge investments
are required to build production facilities and establish brand awareness
amongst people for entry into the pharmaceutical industry. This makes entry
of new companies into this sector very difficult.
(ii) Economies of Scale: Many industries are
characterized by economic activities driven
by economies of scale. Economies of scale
refers to the decline in the per-unit cost of
production (or other activity) as the vol-
ume grows. A large firm that enjoys econ-
omies of scale can produce high volumes
of goods at successively lower cost. This
tends to discourage new entrants who are in expansion stage and have higher
costs. For example, in the semiconductor industry, large companies, such as
IBM, Intel, Samsung and Texas Instruments, enjoy substantial economies of
scale in the production of advanced microprocessors, communication chips and
integrated circuits that power most consumer electronics, personal computers
(PCs) and cellular phones. This acts as a barrier for new entrants.
(iii) Product Differentiation: Product differentiation refers to the physical or
perceptual differences, or enhancements, that make a product special or
unique in the eyes of customers. Firms in personal care and cosmetics

industry actively engage in product differentiation to enhance their products’

features. Differentiation works to reinforce entry barriers because the cost of
creating genuine product differences may be too high for the new entrants.
(iv) Switching Costs: To succeed in an industry, new
entrant must be able to persuade existing custom-
ers of other companies to switch to its products. To
make a switch, buyers may need to test a new firm’s
product, negotiate new purchase contracts, and
train personnel to use the equipment, or modify
facilities for product use. Buyers often incur substantial financial (and psycho-
logical) costs in switching between firms. When such switching costs are high,
buyers are often reluctant to change. For example, high switching costs in
moving away from Microsoft’s Windows operating systems used in personal
computers and corporate servers powered the company’s stunning growth over
the past decade in the software industry. In other words, Microsoft has marketed
its operating system in such a manner that it almost impossible for companies
to sell a new operating system and break into the customer loyalty of Microsoft.
(v) Brand Identity: The brand identity of products or
services offered by existing firms can serve as another
entry barrier. Brand identity is particularly important
for infrequently purchased products that carry a high
unit cost to the buyer. New entrants often encounter
significant difficulties in building up the brand iden-
tity, because to do so they must commit substantial resources over a long
period of time. The gestation period of customer loyalty is quite high, when
customers identify themselves with existing brands. For example, during the
1970s, Japanese companies such as Toyota, Nissan, and Honda had to spend
huge sums on new product development and promotional activities to over-
come the American consumer’s preference for domestic cars. It was a huge
challenge for foreign car makers to break into the customer base of Maruti
Suzuki in the affordable family car segment, because people identified Maruti
Suzuki as India’s own family car company.
(vi) Access to Distribution Channels: The unavailability of distribution channels
for new entrants poses another significant entry barrier. Despite the growing
power of the internet, many firms may continue to rely on their control of
physical distribution channels to create a barrier to entry for rivals. Often,
existing firms have significant influence over the distribution channels and
can retard or impede (can use restrict) their use by new firms. For example,

because of control over distribution channels in India by HUL (Hindustan Uni-

lever), P & G (Procter & Gamble) and Godrej etc., small entrepreneurs find it
very difficult to sell their products through the existing channels. Similarly, with
advent of Patanjali and its strong nation-wide distribution channel, new Ayur-
vedic FMCG companies are facing a challenge.
(vii) Possibility of Aggressive Retaliation: Sometimes the mere threat of aggres-
sive retaliation by incumbents/existing firms can deter entry of new firms into
an existing industry. For example, introduction of products by a new firm may
lead incumbents’ firms to reduce their product prices and increase their adver-
tising budgets. The same way Hindustan Unilever and Palmolive spent huge
sums of money in advertisement to fight Patanjali’s Dant Kanti Toothpaste.
5.2.2 Bargaining Power of Buyers
This is another force that influences the competitive condition of an industry. This
force becomes heavier depending on the possibility of buyers forming groups or
cartels. Mostly, this is a phenomenon seen in industrial products. Quite often, users
of industrial products come together formally or even informally and exert pressure
on the producer. The bargaining power of the buyers influences not only the prices
that the producer can charge but also influences costs and investments of the pro-
ducer. This is because powerful buyers usually bargain for better services which
involves more investment on the part of the producer.
Buyers of an industry’s products or services can sometimes exert considerable pres-
sure on existing firms to secure lower prices or better services. This leverage is
particularly evident when;
(i) Buyers have full knowledge of the source(s) of products and their substitutes.
Thus, challenging the price being charged by producers.
(ii) They spend a lot of money on the industry’s products i.e. they are big buyers.
Thus, in a position to demand favourable terms of contract.
(iii) The industry’s product is not perceived as critical to the buyer’s needs and
buyers are more concentrated than firms supplying the product. They can
easily switch to the substitutes available.
5.2.3 Bargaining Power of Suppliers
Quite often, suppliers too, exercise considerable bargaining power over purchasing
companies. The more specialised the offering from the supplier, greater may be its
clout. Further, when the suppliers are limited in number, they may openly exhibit
their bargaining power. The bargaining power of suppliers determines the cost of

raw materials and other inputs of the industry, and therefore, an industry’s attrac-
tiveness and profitability.
Suppliers can influence the profitability of an industry in a number of ways. Suppli-
ers can command bargaining power over a firm when;
(i) Their products are crucial to the buyer and substitutes are not available.
(ii) They can erect/ensure high switching costs.
(iii) They are more concentrated than their buyers. Less suppliers, more buyers.
5.2.4 The Nature of Rivalry in the Industry
Rivalry between existing players is quite obvious. This is what is normally under-
stood as competition. For any player, the competitors influence strategic decisions
at different strategic levels. The impact is more evident at functional level, like in
the prices being charged, more aggressive advertising, and building pressures on
costs, product and so on.
The intensity of rivalry in an industry is a significant determinant of an industry’s
attractiveness and profitability. The intensity of rivalry can influence the costs of
suppliers, distribution, and of attracting customers and thus, can directly affect the
profitability. “The more intensive the rivalry, the less attractive is the industry”. Ri-
valry among competitors tends to be cutthroat and an industry’s profitability is low
when;
(i) An industry has no clear leader. Therefore, continuous war for leadership.
(ii) Competitors in the industry are numerous.
(iii) Competitors operate with high fixed costs. Thus, aiming for better Return on
Investment with more fierce tactics.
(iv) Competitors face high exit barriers, and therefore, continue to fight for mar-
ket share.
(v) Competitors have little opportunity to differentiate their offerings.
(vi) The industry faces slow or diminished growth.
(i) Industry Leader: A strong industry leader can discourage price wars by dis-
ciplining initiators of such activity. Because of its greater financial resources,
a leader can generally outlast smaller rivals in a price war. Knowing this,
smaller rivals often avoid initiating such a contest. For example, India’s do-
mestic air travel industry has no definite leader, and hence, we often see cut
throat price wars.

(ii) Number of Competitors: Even when an industry leader exists, the leader’s
ability to exert pricing discipline diminishes with the increased number of ri-
vals in the industry as communicating expectations to players becomes more
difficult. For example, majorly in unorganised sectors like handicrafts, due to
huge number of producers, the internal rivalry is immense.
(iii) Fixed Costs: When organisations operate with high fixed costs, they are mo-
tivated to utilize their capacity and therefore, are inclined to drop prices when
they have excess capacity. Price cutting causes profitability to fall for all firms
in the industry, as the firms seek to produce more to cover costs that must
be paid regardless of industry demand, i.e. the fixed costs. For this reason,
profitability tends to be lower in industries (For example, airline, telecommu-
nications) characterized by high fixed costs.
(iv) Exit Barriers: Rivalry amongst competitors declines, if a few competitors
leave the industry. Profitability therefore tends to be higher in industries with
few exit barriers. Exit barriers come in many forms. Assets of a firm consider-
ing exit may be highly specialized and therefore of little value to any other
firm. Therefore, such firm may not be able to find a buyer for its assets. This
discourages exit. When barriers to exit are powerful, competitors desiring exit
may refrain from leaving. Their continued presence in an industry exerts
downward pressure on the profitability of all competitors. The crux is, if an
organisation cannot exit, it would fight for its survival, and thus, intensify
competition.
(v) Product Differentiation: Firms can sometimes insulate themselves from
price wars by differentiating their products from those of its rivals. As a con-
sequence, profitability tends to be higher in industries that offer opportunity
for differentiation. Profitability tends to be lower in industries involving un-
differentiated commodities such as, memory chips, natural resources, pro-
cessed metals and railroads. For example, ONGC and Indian Oil, cannot offer
major product differentiation in their products. Hence, the level of competition
would always be high.
(vi) Slow Growth: Industries whose growth is declining tend to face more intense
rivalry. It is so because, as an industry’s growth declines, rivals would often
fight harder to grow or sustain their existing market share. The resulting in-
tensive rivalry tends to reduce profitability for all.

5.2.5 Threat of Substitutes

Substitute products are a latent/hidden but existing source of competition in an
industry. In many cases they grow to become a major constituent of competition.
Substitute products that offer a price advantage and/or performance improvement
to the consumers, can drastically alter the competitive character of an industry.
Surprisingly, they can bring it about all of a sudden. For example, coir suffered at
the hands of synthetic fibre. Wherever significant investment in R&D is taking place,
threats from substitute products can be expected. Substitutes, too, usually limit the
prices and profits of an industry.
As per Michael Porter, a final force that can influence an industry’s profitability, is
the availability of substitutes for that industry’s products. To predict profit pressure
from this source of competition, firms must search for products that can perform
the same, or nearly the same, functionalities as their own products. For example,
Real estate, insurance, bonds and bank deposits are clear substitutes for common
stocks, because they represent alternate ways to invest funds.
The threat of substitutes is great in many high tech industries as well. For example,
introduction of digital film-less cameras virtually replaces the film cameras and
threatened the existence of Eastman Kodak and Fuji Film. Further, the introduction
of smart phones has replaced cameras to a great extent.
The rapidly changing education landscape, with the advent of online courses and
degrees, is a perfect example of a substitute to the existing educational system, with
better approachability and access.
The above discussed five forces together determine an industry’s attractive-

ness/profitability. This is so because these forces influence the causes, that underlie
industry attractiveness/profitability. For example, elements such as cost and invest-
ment needed for being a player in the industry decide industry profitability, and all
such elements are governed by these forces. The collective strength of these five
competitive forces determines the scope to earn attractive profits. As mentioned in
the beginning, the strength of these forces may vary from industry to industry.

5.3 BUSINESS LEVEL STRATEGIES

An organization’s core competencies should be focused on satisfying customers’
needs and wants in order to achieve better than average returns. This is done
through Business-Level Strategies. Business level strategies detail out the actions
to be taken to provide value to customers and gain a competitive advantage, by
exploiting core competencies. Business-level strategy is concerned with a firm’s
position in the industry, in relation to its competitors and to the five forces of com-
petition discussed above.
“Customers are the foundation of an organization’s business-level strategies". Who
will be served, what needs are to be met, and how those needs will be satisfied, are
determined by the senior management, while drafting Business Level Strategies?
Who are the customers?
Knowing one’s customers is of utmost importance in obtaining and sustaining a
competitive advantage. Being able to successfully predict and satisfy future cus-
tomer needs is equally important. Perhaps one of the Tata’s mistakes in manufac-
turing Nano, was to not being able to understand the customer’s actual need. They
wanted a small, affordable city car, but durability was of more importance.
How to satisfy customer needs?
Organizations must determine how to bundle its resources and capabilities, to form
core competencies, and then use these core competencies to satisfy customer
needs and create value for them.
Having selected a market, the organization must develop a plan to be successful in
that market. Business strategy therefore looks at how the organization can compete
successfully in the individual markets that it chooses to operate in.
Business level strategy is concerned with issues such as:
♦ Identifying and meeting the needs of key customers
♦ Achieving advantage over competitors
♦ Avoiding competitive disadvantage
5.4 MICHAEL PORTER’S GENERIC STRATEGIES

We discussed about the five forces of competition as per Michael Porter. Once we
identify these forces and their corresponding strength, the task at hand for the
management is to respond to these forces strategically. According to Porter,

strategies allow organizations to gain competitive advantage from three different

bases: cost leadership, differentiation, and focus. Porter called these base generic
strategies. These strategies have been termed generic, because they can be pur-
sued by any type or size of business firm and even by not-for-profit organisations.
Cost leadership emphasizes on producing standardized products at a very low per-
unit cost for consumers who are price-sensitive.
Differentiation is a strategy aimed at producing products and services considered
unique industry-wide and directed at consumers who are relatively price-insensi-
tive.
Focus means producing products and services that fulfil the needs of small groups
of consumers with very specific taste.
Porter’s strategies imply different organizational arrangements, control procedures,
and incentive systems. Larger firms with greater access to resources typically com-
pete on a cost leadership and/or differentiation basis, whereas smaller firms often
compete on a focus basis.
Broad
Cost Leadership Differentiation
COMPETI- Target
TIVE SCOPE
Narrow Focussed Cost Focussed Differenti-
Target Leadership ation
Low-Cost products/ser- Differentiated prod-

vices ucts/services
COMPETITIVE ADVANTAGE
Figure: Michael Porter’s Generic Strategies

Porter stresses the need for strategists to perform cost-benefit analysis to evaluate
“sharing opportunities” among the firm’s existing and potential business units.
Sharing activities and resources enhances competitive advantage by lowering costs
or raising differentiation. In addition to prompting sharing, Porter stresses the need
for firms to “transfer” skills and expertise among autonomous business units effec-
tively in order to gain competitive advantage. Depending upon factors such as type
of industry, size of firm and nature of competition, various strategies could yield
advantages in cost leadership differentiation, and focus.

5.4.1 Cost Leadership Strategy

It is a low-cost competitive strategy that aims at broad mass market. It requires
vigorous pursuit of cost reduction in the areas of procurement, production, storage
and distribution of product or service and also economies in overhead costs. Be-
cause of its lower costs, the cost leader is able to charge a lower price for its prod-
ucts than most of its competitors and still earn satisfactory profits. For example,
McDonald’s fast-food restaurants have successfully followed low cost leadership
strategy. Decathlon Group’s mega sports stores have been following low-cost leader-
ship strategy to gain international recognition and also beat competition.
A primary reason for pursuing forward, backward, and horizontal integration strat-
egies is to gain cost leadership benefits. Generally, cost leadership must be pursued
in conjunction with differentiation. A number of cost elements affect the relative
attractiveness of generic strategies, including economies or diseconomies of scale
achieved, learning and experience curve effects, the percentage of capacity utiliza-
tion achieved, and linkages with suppliers and distributors. Other cost elements to
consider while choosing among alternative generic strategies include the potential
for sharing costs and knowledge within the organization, R&D costs associated with
new product development or modification of existing products, labour costs, tax
rates, energy costs, and shipping costs. This internal strategy of sharing resources
to build a competitive advantage is called synergy benefit.
Striving to be a low-cost producer in an industry can especially be effective,
♦ when the market is composed of many price-sensitive buyers and
♦ when there are few ways to achieve product differentiation.
Further, when buyers do not care much about differences from brand to brand, or
when there are a large number of buyers with significant bargaining power. The
basic idea is to underprice competitors and thereby gain market share driving some
of the competitors out of the market.
A successful cost leadership strategy usually permeates the entire firm, as evi-
denced by high efficiency, low overheads, limited perks, intolerance of waste, in-
tensive screening of budget requests, wide span of controls, rewards linked to cost
containment, and broad employee participation in cost control efforts.
Some risks of pursuing cost leadership are;
♦ that competitors may imitate the strategy, therefore driving overall industry
profits down;

♦ that technological breakthroughs in the industry may make the strategy inef-
fective; or that buyer interests may swing to other differentiating features
besides price.
Achieving Cost Leadership Strategy
To achieve cost leadership, following actions could be taken:
1. Prompt forecasting of demand of a product or service.
2. Optimum utilization of the resources to achieve cost advantages.
3. Achieving economies of scale; thus, lower per unit cost of product/service.
4. Standardisation of products for mass production to yield lower cost per unit.
(Example of McDonald’s)
5. Invest in cost saving technologies and using advance technology for smart
efficient working.
6. Resistance to differentiation till it becomes essential.
Advantages of Cost Leadership Strategy
Earlier we have discussed Porter’s Five Forces Model in detail. A cost leadership
strategy may help to remain profitable even with: rivalry, new entrants, suppliers’
power, substitute products, and buyers’ power.
1. Rivalry – Competitors are likely to avoid a price war, since the low-cost firm
will continue to earn profits even after competitors compete away their prof-
its.
2. Buyers – Powerful buyers/customers would not be able to exploit the cost
leader firm and will continue to buy its product.
3. Suppliers – Cost leaders are able to absorb greater price increases from sup-
pliers before they need to raise prices for customers.
4. Entrants – Low-cost leaders create barriers to market entry through their con-
tinuous focus on efficiency and cost reduction.
5. Substitutes – Low-cost leaders are more likely to lower the costs to induce
existing customers to stay with their products, invest in developing substi-
tutes, and even purchase patents.
Disadvantages of Cost Leadership Strategy
1. Cost advantage may not last long as competitors may imitate cost reduction
techniques.

2. Cost leadership can succeed only if the firm can achieve higher sales volume.
3. Cost leaders tend to keep their costs low by minimizing cost of advertising,
market research, and research and development, but this approach can prove
to be expensive in the long run.
4. Technological advancement is a great threat to cost leaders.
5.4.2 Differentiation Strategy
This strategy is aimed at broad mass market and involves the creation of a product
or service that is perceived by the customers as unique. The uniqueness can be
associated with product design, brand image, features, technology, dealer network
or customer service. Because of differentiation, the business can charge a premium
for its product. For example, Domino’s Pizza has been offering home delivery within
30 minutes or the order is free, is a unique selling point that differentiates if from its
rivals.
Differentiation does not guarantee competitive advantage, especially if standard
products sufficiently meet customer needs or if rapid imitation by competitors is
possible. Durable products protected by barriers to quick imitation by competitors
is better. Successful differentiation can mean greater product flexibility, greater
compatibility, lower costs, improved service, less maintenance, greater conven-
ience, or more features. Product development is an example of a strategy that of-
fers the advantages of differentiation.
Differentiation strategy should be pursued only after a careful study of buyers’
needs and preferences to determine the feasibility of incorporating one or more
differentiating features into a unique product that features the customers’ desired
attributes. A successful differentiation strategy allows a firm to charge a higher
price for its product and to gain customer loyalty, because consumers may become
strongly attached to the differentiated features. Special features that differentiate
one’s product can include superior service, spare parts availability, engineering de-
sign, product performance, useful life, gas mileage, or ease of use.
A risk associated with pursuing a differentiation strategy is that the unique product
may not be valued high enough by customers to justify the higher price. When this
happens, a cost leadership strategy will easily defeat a differentiation strategy. An-
other risk of pursuing a differentiation strategy is that competitors may develop
ways to copy the differentiating features quickly. Firms must find durable sources
of uniqueness that cannot be imitated quickly or cheaply by rival firms. For exam-
ple, Amazon Prime offers deliver within two hours. This is quite difficult to imitate by
its rivals, and thus this differentiating factor helps it to lead the market.

Basis of Differentiation
There are several bases of differentiation, major being: Product, Pricing and Organ-
ization.
♦ Product: Innovative products that meet customer needs can be an area
where a company has an advantage over competitors. However, the pursuit
of a new product offering can be costly – research and development, as well
as production and marketing costs can all add to the cost of production and
distribution. The payoff, however, can be great as customer’s flock to be
among the first to have the new product. For example, Apple iPhone, has
invested huge amounts of money in R&D, and the customers’ value that. They
want to be among the first ones to try the new offerings from the company.
♦ Pricing: It fluctuates based on its supply and demand, and may also be influ-
enced by the customer’s ideal value for a product. Companies that differen-
tiate based on product price can either determine to offer the lowest price or
can attempt to establish superiority through higher prices. For example, Ap-
ple iPhone dominates the smart phone segment by charging higher prices for
its products.
♦ Organisation: Organisational differentiation is yet another form of differen-
tiation. Maximizing the power of a brand or using the specific advantages
that an organization possesses can be instrumental to a company’s success.
Location advantage, name recognition and customer loyalty can all provide
additional ways for a company differentiate itself from the competition. For
example, Apple has been building customer loyalty since years and has a
fanbase of consumers that are called “Apple Fanboys/Fangirls”
Achieving Differentiation Strategy
To achieve differentiation, following strategies could be adopted by an organisation:
1. Offer utility to the customers and match products with their tastes and pref-
erences.
2. Elevate/Improve performance of the product.
3. Offer the high-quality product/service for buyer satisfaction.
4. Rapid product innovation to keep up with dynamic environment.
5. Taking steps for enhancing brand image and brand value.
6. Fixing product prices based on the unique features of product and buying
capacity of the customer.

Advantages of Differentiation Strategy

A differentiation strategy may help an organisation to remain profitable even with:
rivalry, new entrants, suppliers’ power, substitute products, and buyers’ power.
1. Rivalry - Brand loyalty acts as a safeguard against competitors. It means that
customers will be less sensitive to price increases, as long as the firm can
satisfy the needs of its customers.
2. Buyers – They do not negotiate for price as they get special features and they
have fewer options in the market.
3. Suppliers – Because differentiators charge a premium price, they can afford
to absorb higher costs of supplies as the customers are willing to pay extra
too.
4. Entrants – Innovative features are an expensive offer. So, new entrants gen-
erally avoid these features because it is tough for them to provide the same
product with special features at a comparable price.
5. Substitutes – Substitute products can’t replace differentiated products which
have high brand value and enjoy customer loyalty.
Disadvantages of Differentiation Strategy
1. In the long term, uniqueness is difficult to sustain.
2. Charging too high a price for differentiated features may cause the customer
to switch-off to another alternative. As we see a shift of iPhone users to other
android flagship smart phones.
3. Differentiation fails to work if its basis is something that is not valued by the
customers. Home delivery of packed snacks in 30 minutes would not even be a
differentiator as the consumer wouldn’t value such an offer.
5.4.3 Focus Strategies
A successful focus strategy depends on an industry segment that is of sufficient
size, has good growth potential, and is not crucial to the success of other major
competitors. Strategies such as market penetration (new product for existing cus-
tomers) and market development (new product for new customers) offer substan-
tial focusing advantages. Midsize and large firms can effectively pursue focus-
based strategies only in conjunction with differentiation or cost leadership-based
strategies. All firms in essence follow a differentiated strategy. Because only one
firm can differentiate itself with the lowest cost, the remaining firms in the industry
must find other ways to differentiate their products.

Focus strategies are most effective when consumers have distinctive preferences or
requirements, and when the rival firms are not attempting to specialize in the same
target segment. Risks of pursuing a focus strategy include the possibility of numer-
ous competitors recognizing the successful focus strategy and imitating it, or that
consumer preferences may drift towards the product attributes desired by the mar-
ket as a whole. An organization using a focus strategy may concentrate on a par-
ticular group of customers, geographic markets, or on particular product-line seg-
ments in order to serve a well-defined but narrow market better than competitors
who serve a broader market. For example, Ferrari sports cars.
5.4.3.1 Focused cost leadership: A focused cost leadership strategy requires com-
peting based on price to target a narrow market. A firm that follows this strategy
does not necessarily charge the lowest prices in the industry. Instead, it charges
low prices relative to other firms that compete within the target market. Firms that
compete based on price and target a narrow market follow a focused cost leader-
ship strategy.
5.4.3.2 Focused differentiation: A focused differentiation strategy requires offer-
ing unique features that fulfil the demands of a narrow market. Similar to focused
low-cost strategy, narrow markets are defined in different ways in different settings.
Some firms using a focused differentiation strategy concentrate their efforts on a
particular sales channel, such as selling over the internet only. Others target partic-
ular demographic groups. Firms that compete based on uniqueness and target a
narrow market are following a focused differentiations strategy. For example,
Rolls-Royce sells limited number of high-end, custom-built cars.
Achieving Focused Strategy
To achieve focused cost leadership/differentiation, following strategies could be
adopted by an organization:
1. Selecting specific niches which are not covered by cost leaders and differen-
tiators.
2. Creating superior skills for catering such niche markets.
3. Generating high efficiencies for serving such niche markets.
4. Developing innovative ways in managing the value chain.
Advantages of Focused Strategy
1. Premium prices can be charged by the organisations for their focused prod-
uct/services.

2. Due to the tremendous expertise in the goods and services that the organi-
sations following focus strategy offer, rivals and new entrants may find it dif-
ficult to compete.
Disadvantages of Focused Strategy
1. The firms lacking in distinctive competencies may not be able to pursue focus
strategy.
2. Due to the limited demand of product/services, costs are high, which can
cause problems.
3. In the long run, the niche could disappear or be taken over by larger com-
petitors by acquiring the same distinctive competencies.
5.5 BEST-COST PROVIDER STRATEGY

The new model of best cost provider strategy is a further development of above
three generic strategies. It is directed towards giving customers more value for the
money by emphasizing on both, low cost and upscale differences. The objective is
to keep costs and prices lower than those of other sellers of “comparable products".
Figure: The Five Generic Competitive Strategies

Best-cost provider strategy involves providing customers more value for the money
by emphasizing on lower cost and better quality differences. It can be done through:
(a) offering products at lower price than what is being offered by rivals for prod-
ucts with comparable quality and features
or
(b) charging similar price as by the rivals for products with much higher quality
and better features.

For example, android flagship phones from OnePlus, Xiaomi, Oppo, Vivo, etc, are
all rooting for giving better quality at lowest prices to the customers. They are fol-
lowing the best-cost provider strategy to penetrate market.
Distinctive Features of the generic competitive strategies are given below:

Features Low-Cost Broad Best-Cost Focused Low-
Provider Differentiation Provider Cost and
Focused
Differentiation
Strategic A broad cross- A broad cross Value- A narrow market
Target section of the section of the conscious niche where
market. market. buyer. buyer needs and
preferences are
distinctively
different from the
rest of the
market.
Basis of Lower costs An ability to More value for Lower cost in
competitive than offer buyers the money. serving the niche
advantage. competitors. something (focused low cost)
different from or special
competitors. attributes that
appeal to the
tastes or
requirements of
niche members
(focused
differentiation).
Market Try to make a Build in Either under Communicate
emphasis virtue out of whatever price rival how the focuser’s
product features buyers brands with product
features that are willing to comparable attributes and
lead to low pay for charge a features or capabilities aim at
cost. premium price match the catering to niche
to cover the price of rivals member tastes
extra cost of and provide and/or
differentiating better features specialised
features. to build a requirements.
reputation for

delivering the
best value.
Sustaining Offer Communicate Develop Remain totally
the strategy economical the points of unique dedicated to
prices/good difference in expertise in serving the niche
value credible ways simultaneously better than other
Aim at Stress constant managing competitors;
contributing to improvement costs down don’t blunt the
a sustainable and use and upscaling firm’s image and
cost innovation to features and efforts by
advantage-the stay ahead of attributes. entering other
key is to initiative segments or
manage costs competitors adding other
down, year Concentrate on product
after year, in a few categories to
every area of differentiating widen market
the business. features; tout appeal.
them to create a
reputation and
brand image.
Product line A good basic Many product Good-to- Features and
product with variations, wide excellent attributes that
few frills selection, attributes, appeal to the
(acceptable strong several-to- tastes and/or
quality and emphasis on many upscale special needs of
limited differentiating features. the target
selection). features. segment.
Product A continuous Creation of Incorporation Tailor-made for
emphasis search for cost value for buyer; of upscale the tastes and
reduction strive for features and requirements of
without product attributes at niche members.
sacrificing superiority. low cost.
acceptable
quality and
essential
features.

SUMMARY
To gain a deeper understanding of competitive environment of a business organi-
sation, we learnt, Michael Porter’s five forces of competition model. The five forces
being – threat of new entrants, bargaining power of customers, bargaining power
of suppliers, rivalry among current players and threats from substitutes – they im-
pact organizations in significant and different manner.
Business level strategies - detail out the actions to be taken to provide value to
customers and gain a competitive advantage by exploiting core competencies in
specific, individual product or service markets.
Michael Porter has further given three generic strategies that are used to help or-
ganizations establish a competitive advantage over their industry rivals. Firms may
choose to compete across a broad market or a focused market. These strategies
are - cost leadership strategy, differentiation strategy, and focus strategy.
A combination of above - to provide better features at similar prices of the rivals,
or similar features at lower prices from the rivals - an organisation can also opt for
Best Cost Provider Strategy.
TEST YOUR KNOWLEDGE

Scenario Based Questions
Question 1
Airlines industry in India is highly competitive with several players. Businesses face
severe competition and aggressively market themselves with each other. Luxury Jet
is a private Delhi based company with a fleet size of 9 small aircrafts with seating
capacity ranging between 6 seats to 9 seats. There aircrafts are chartered by big
business houses and high net worth individuals for their personalised use. With
customised tourism packages their aircrafts are also often hired by foreigners. Iden-
tify and explain the Michael Porter’s Generic Strategy followed by Luxury Jet.
Answer
The Airlines industry faces stiff competition. However, Luxury Jet has attempted to
create a niche market by adopting focused differentiation strategy. A focused dif-
ferentiation strategy requires offering unique features that fulfil the demands of a
narrow market.
Luxury Jet compete in the market based on uniqueness and target a narrow market
which provides business houses, high net worth individuals to maintain strict

schedules. The option of charter flights provided several advantages including, flex-
ibility, privacy, luxury and many a times cost saving. Apart from conveniences, the
facility will provide time flexibility. Travelling by private jet is the most comfortable,
safe and secure way of flying your company’s senior business personnel.
Chartered services in airlines can have both business and private use. Personalized
tourism packages can be provided to those who can afford it.
Question 2
Gennex is a company that designs, manufactures and sells computer hardware and
software. Gennex is well known for its innovative products that has helped the com-
pany to have advantage over its competitors. It also spends on research and devel-
opment and concerned with innovative softwares. Often the unique features of
their product, that are not available with their competitors helps them to gain com-
petitive advantage. Gennex using the strategy is consistently gaining its position in
the industry over its competitors.
Identify and explain the Porter’s generic strategy which Gennex has opted to gain
the competitive advantage.
Answer
According to Porter, strategies allow organizations to gain competitive advantage
from three different bases: cost leadership, differentiation, and focus. Porter called
these base generic strategies.
Gennex has opted differentiation strategy. Its products are designed and produced
to give the customer value and quality. They are unique and serve specific customer
needs that are not met by other companies in the industry. Highly differentiated
and unique hardware and software enables Gennex to charge premium prices for
its products hence making higher profits and maintain its competitive position in
the market.
Differentiation strategy is aimed at broad mass market and involves the creation of
a product or service that is perceived by the customers as unique. The uniqueness
can be associated with product design, brand image, features, technology, dealer
network or customer service.
Question 3
Rahul Sharma is Managing Director of a company which is manufacturing trucks.
He is worried about the entry of new businesses. What kind of barriers will help
Rahul against such a threat?

Answer
A firm’s profitability tends to be higher when other firms are blocked from entering
the industry. New entrants can reduce industry profitability because they add new
production capacity leading to increase supply of the product even at a lower price
and can substantially erode existing firm’s market share position. Barriers to entry
represent economic forces that slow down or impede entry by other firms. Common
barriers to entry include:
(i) Capital Requirements: When a large amount of capital is required to enter
an industry, firms lacking funds are effectively barred from the industry, thus
enhancing the profitability of existing firms in the industry.
(ii) Economies of Scale: Many industries are characterized by economic activi-
ties driven by economies of scale. Economies of scale refer to the decline in
the per-unit cost of production (or other activity) as volume grows.
(iii) Product Differentiation: Product differentiation refers to the physical or
perceptual differences, or enhancements, that make a product special or
unique in the eyes of customers.
(iv) Switching Costs: To succeed in an industry, new entrant must be able to
persuade existing customers of other companies to switch to its products.
When such switching costs are high, buyers are often reluctant to change.
(v) Brand Identity: The brand identity of products or services offered by existing
firms can serve as another entry barrier. Brand identity is particularly im-
portant for infrequently purchased products that carry a high unit cost to the
buyer.
(vi) Access to Distribution Channels: The unavailability of distribution channels
for new entrants poses another significant entry barrier. Despite the growing
power of the internet, many firms may continue to rely on their control of
physical distribution channels to sustain a barrier to entry to rivals.
(vii) Possibility of Aggressive Retaliation: Sometimes the mere threat of aggres-
sive retaliation by incumbents can deter entry by other firms into an existing
industry.
Question 4
Sohan and Ramesh are two friends who are partners in their business of making
biscuits. Sohan believe in making profits through selling more volume of products.
Hence, he believes in charging lesser price to the customers. Ramesh, however, of

the opinion that higher price should be charged to create an image of exclusivity
and for this, he proposes that the product to undergo some change.
Analyse the nature of generic strategy used by Sohan and Ramesh.
Answer
Considering the generic strategies of Porter there are three different bases: cost
leadership, differentiation and focus. Sohan and Ramesh are contemplating pricing
for their product.
Sohan is trying to have a low price and high volume is thereby trying for cost lead-
ership. Cost leadership emphasizes producing standardised products at a very low
per unit cost for consumers who are price sensitive.
Ramesh desires to create perceived value for the product and charge higher prices.
He is trying to adopt differentiation. Differentiation is aimed at producing products
and services considered unique industry wide and directed at consumers who are
relatively price insensitive.
Question 5
Infant care is a successful store chain that caters products for expectant mothers
and new moms. They offer everything from nursing classes to strollers, toys, infant
clothes, diapers and baby furniture. Due to a one-stop shop for infants, they are
charging a premium for its products.
Identify and explain how the strategy adopted by infant care.
Answer
Infant care is opting for differentiation strategy. A one-stop shop is a benefit for
this type of customers, seeking convenience in a time. Infant care is catering the
products only related to an infant that is perceived by the customers as unique.
Because of differentiation, the Infant care is charging a premium for its product.
Question 6
A century-old footwear company “Mota Shoes” had an image of being the footwear
choice for formal occasions. In an attempt to reinvent its brand, it tied up with a
foreign footwear giant “Buffrine” to manufacture and sell its Hideseek brand in the
country. Putting its best foot forward, it launched extra soft, casual and relaxed
footwear for young. Aiming at a brand and image makeover the “Mota Shoes” de-
cided to price the Hide Seek products at premium.
What kind of Michael Porter business level strategy is being used by “Mota Shoe
company”? State its advantages.

Answer
Mota shoes is trying to use differentiation. This strategy is aimed at broad mass
market and involves the creation of a product or service that is perceived by the
customers as unique. The uniqueness can be associated with product design, brand
image, features, technology, dealer network or customer service. Because of differ-
entiation, the business can charge a premium for its product.
A differentiation strategy has definite advantages as it may help to remain profita-
ble even with rivalry, new entrants, suppliers’ power, substitute products, and buy-
ers’ power.
i. Rivalry: Brand loyalty acts as a safeguard against competitors. It means that
customers will be less sensitive to price increases, as long as the firm can
satisfy the needs of its customers.
ii. Buyers: They do not negotiate for price as they get special features and also,
they have fewer options in the market.
iii. Suppliers: Because differentiators charge a premium price, they can afford to
absorb higher costs of supplies and customers are willing to pay extra too.
iv. New entrants: Innovative features are expensive to copy. So, new entrants
generally avoid these features because it is tough for them to provide the
same product with special features at a comparable price.
v. Substitutes: Substitute products can’t replace differentiated products which
have high brand value and enjoy customer loyalty.
Question 7
Eco-carry bags Ltd., a recyclable plastic bags manufacturing, and trading company
has seen a potential in the ever-growing awareness around hazards of plastics and
the positive outlook of the society towards recycling and reusing plastics.
A major concern for Eco-carry bags Ltd. are paper bags and old cloth bags. Even
though they are costlier than recyclable plastic bags, irrespective, they are being
welcomed positively by the consumers.
Identify and explain that competition from paper bags and old cloth bags fall under
which category of Porter’s Five Forces Model for Competitive Analysis?
Answer
Eco-carry bags Ltd. faces competition from paper bags and old cloth bags and falls
under Threat of Substitutes force categories in Porter’s Five Forces Model for Com-
petitive Analysis. Paper and cloth bags are substitutes of recyclable plastic bags as

they perform the same function as plastic bags. Substitute products are a latent
source of competition in an industry. In many cases, they become a major constit-
uent of competition. Substitute products offering a price advantage and/or perfor-
mance improvement to the consumer can drastically alter the competitive character
of an industry.
Question 8
Baby Turtle is a children's clothing brand that has been created a new age demand
for washable diapers. The major benefit for the brand has been that not many com-
panies have shown interest in the product, thinking it is not viable, however, cus-
tomers, majorly working mothers are loving their product. The core material
needed for production is also used in many other water proofing products in vari-
ous industries. Baby Turtle sources this material from a renowned supplier at com-
paratively low prices. Which of the five forces of competitive pressure would Baby
Turtle experience due to above setup and what are major factors that create such
pressure for a product? Do you think Baby Shark has an advantage in some way to
fight off this pressure?
Answer
Baby Turtle would experience, Bargaining Power of Suppliers, as a competitive
pressure for their washable diaper product. This is because the core material for
production is sourced from a single supplier, who is renowned and in a position to
create pressure in terms of prices.
Further, other factors that lead to such pressure are:
1. Their products are crucial to the buyer and substitutes to the material re-
quired for production are not available.
2. Suppliers can manipulate switching cost as the brand is in inception stage
and making margins are important.
An advantage that Baby Turtle has is even though the material required has no
substitutes but it used to make many other products and thus there are many other
suppliers who can provide that material. It might affect operations in short term
but will help to fight off the pressure created by existing supplier.
Question 9
Domolo is a premium cycle and cycling equipments brand which targets high
spending customer with a liking for quality and brand name. Their cycles range
from rupees fifteen thousand to rupees one lac. The recent trend of fitness through

cycling has created humongous demand for cycles and peripherals like helmets,
lights, braking systems, fitness applications, etc. The customer base has grown
150% in the last three months. Mr. Vijay, who is an investor wants to tap in this
industry and bring about cheaper options to people who cannot spend so much.
Which business level strategy would best suit for Mr. Vijay’s idea and what are the
major sub-strategies that can be implemented to capture maximum market?
Answer
The Best Cost Provider strategy would ensure a better reach to the not so affluent
customers and provide them with good quality cycles and equipments, thus tap-
ping in on the increasing trend of cycling.
Two sub-strategies that can be implemented are:
1. Offering lower prices than rivals for the same quality of products
2. Charging same prices for better quality of products
The idea of Mr.Vijay is to provide almost same quality of products in terms of func-
tionality if not so in terms of branding, to customer who do not have huge sums of
money to pay. Thus, sub-strategy number one, offering lower prices for almost
same quality should be implemented to become the best cost provider of cycles
and related equipments in the market.
Question 10
ABC Ltd. is a beverage manufacturing company. It chiefly manufactures soft drinks.
The products are priced on the lower side which has made the company a leader
in the business. Currently it is holding 35 percent market share. The R & D of com-
pany developed a formula for manufacturing sugar free beverages. On successful
trial and approval by the competent authorities, company was granted to manu-
facture sugar free beverages. This company is the pioneer to launch sugar free
beverages which are sold at a relatively higher price. This new product has been
accepted widely by a class of customers. These products have proved profitable
for the company. Identify the strategy employed by the company ABC Ltd. and
mention what measures could be adopted by the company to achieve the em-
ployed strategy.
Answer
According to Porter, strategies allow organizations to gain competitive advantage
from three different bases: cost leadership, differentiation, and focus. Porter called
these base generic strategies.

ABC Ltd. has opted Differentiation Strategy. The company has invested huge
amount in R & D and developed a formula for manufacturing sugar free beverages
to give the customer value and quality. They are pioneer and serve specific cus-
tomer needs that are not met by other companies in the industry. The new prod-
uct has been accepted by a class of customers. Differentiated and unique sugar
free beverages enable ABC Ltd. to charge relatively higher for its products hence
making higher profits and maintain its competitive position in the market.
Sugar free beverage of ABC Ltd. is being accepted widely by a class of customers.
Differentiation strategy is aimed at broad mass market and involves the creation of
a product or service that is perceived by the customers as unique. The uniqueness
can be associated with product design, brand image, features, technology, and
dealer network or customer service.
Achieving Differentiation Strategy
To achieve differentiation, following strategies are generally adopted by an organ-
ization:
1. Offer utility to the customers and match products with their tastes and pref-
erences.
2. Elevate/Improve performance of the product.
3. Offer the high-quality product/service for buyer satisfaction.
4. Rapid product innovation to keep up with dynamic environment.
5. Taking steps for enhancing brand image and brand value.
6. Fixing product prices based on the unique features of product and buying
capacity of the customer.
Question 11
Spacetek Pvt. Ltd. is an IT company. Although there is cut throat competition in the
IT sector, Spacetek deals with distinctive niche clients and is generating high effi-
ciencies for serving such niche market. Other rival firms are not attempting to spe-
cialize in the same target market. Identify the strategy adopted by Spacetek Pvt.
Ltd. and also explain the advantages and disadvantages of that strategy.
Answer
Spacetek Pvt. Ltd. company has adopted Focus strategy which is one of the Michael
Porter’s Generic strategies. Focus strategies are most effective when consumers
have distinctive preferences or requirements and when rival firms are not attempt-
ing to specialize in the same target segment. An organization using a focus strategy

may concentrate on a particular group of customers, geographic markets, or on

particular product-line segments in order to serve a well-defined but narrow mar-
ket better than competitors who serve a broader market.
Advantages of Focus Strategy
1. Premium prices can be charged by the organizations for their focused prod-
uct/services.
2. Due to the tremendous expertise about the goods and services that organi-
zations following focus strategy offer, rivals and new entrants may find it dif-
ficult to compete.
Disadvantages of Focus Strategy
1. The firms lacking in distinctive competencies may not be able to pursue focus
strategy.
2. Due to the limited demand of product/services, costs are high which can
cause problems.
3. In the long run, the niche could disappear or be taken over by larger com-
petitors by acquiring the same distinctive competencies.
Descriptive Questions
Question 12
Explain Porter’s five forces model as to how businesses can deal with the competi-
tion.
Answer
To gain a deep understanding of a company’s industry and competitive environ-
ment, managers do not need to gather all the information they can find and waste
a lot of time digesting it. Rather, the task is much more focused. A powerful and
widely used tool for systematically diagnosing the significant competitive pressures
in a market and assessing the strength and importance of each is the Porter’s five-
forces model of competition. This model holds that the state of competition in an
industry is a composite of competitive pressures operating in five areas of the over-
all market:
• Competitive pressures associated with the market manoeuvring and jockey-
ing for buyer patronage that goes on among rival sellers in the industry.
• Competitive pressures associated with the threat of new entrants into the
market.

• Competitive pressures coming from the attempts of companies in other in-

dustries to win buyers over to their own substitute products.
• Competitive pressures stemming from supplier bargaining power and sup-
plier-seller collaboration.
• Competitive pressures stemming from buyer bargaining power and seller-
buyer Collaboration.
Question 13
Distinguish between Cost Leadership and Differentiation Strategies.
Answer
Cost leadership emphasizes producing standardized products at a very low per-
unit cost for consumers who are price-sensitive. Differentiation is a strategy aimed
at producing products and services considered unique industry wide and directed
at consumers who are relatively price insensitive.
A primary reason for pursuing forward, backward, and horizontal integration strat-
egies is to gain cost leadership benefits. But cost leadership generally must be pur-
sued in conjunction with differentiation. Different strategies offer different degrees
of differentiation. A differentiation strategy should be pursued only after a careful
study of buyers’ needs and preferences to determine the feasibility of incorporating
one or more differentiating features into a unique product. A successful differenti-
ation strategy allows a firm to charge a higher price for its product and to gain
customer loyalty.
Question 14
What are the five competitive forces in an industry as identified by Michael Porter?
Answer
Five forces model of Michael Porter is a powerful and widely used tool for system-
atically diagnosing the significant competitive pressures in the market and as-
sessing their strength and importance. The model holds that the state of competi-
tion in an industry is a composite of competitive pressures operating in five areas
of the overall market. These five forces are:
1. Threat of new entrants: New entrants are always a powerful source of com-
petition. The new capacity and product range they bring in throw up new
competitive pressure. And the bigger the new entrant, the more severe the
competitive effect. New entrants also place a limit on prices and affect the
profitability of existing players.

2. Bargaining power of customers: This is another force that influences the

competitive condition of the industry. This force will become heavier depend-
ing on the possibilities of the buyers’ forming groups or cartels. Mostly, this
is a phenomenon seen in industrial products. Quite often, users of industrial
products come together formally or informally and exert pressure on the pro-
ducer. The bargaining power of the buyers influences not only the prices that
the producer can charge but also influences in many cases, costs and invest-
ments of the producer because powerful buyers usually bargain for better
services which involve costs and investment on the part of the producer.
3. Bargaining power of suppliers: Quite often suppliers, too, exercise consid-
erable bargaining power over companies. The more specialised the offering
from the supplier, greater is his clout. And, if the suppliers are also limited in
number, they stand a still better chance to exhibit their bargaining power.
The bargaining power of suppliers determines the cost of raw materials and
other inputs of the industry and, therefore, industry attractiveness and prof-
itability.
4. Rivalry among current players: The rivalry among existing players is quite
obvious. This is what is normally understood as competition. For any player,
the competitors influence strategic decisions at different strategic levels. The
impact is evident more at functional level in the prices being charged, adver-
tising, and pressures on costs, product and so on.
5. Threats from substitutes: Substitute products are a latent source of compe-
tition in an industry. In many cases they become a major constituent of com-
petition. Substitute products offering a price advantage and/or performance
improvement to the consumer can drastically alter the competitive character
of an industry. And they can bring it about all of a sudden. For example, coir
suffered at the hands of synthetic fibre. Wherever substantial investment in
R&D is taking place, threats from substitute products can be expected. Sub-
stitutes, too, usually limit the prices and profits in an industry.
The five forces together determine industry attractiveness/profitability. This is so
because these forces influence the causes that underlie industry attractiveness/
profitability. For example, elements such as cost and investment needed for being a
player in the industry decide industry profitability, and all such elements are governed
by these forces. The collective strength of these five competitive forces determines the
scope to earn attractive profits. The strength of the forces may vary from industry to
industry.

Business Level Strategies: After Studying This Chapter, You Will Be Able To

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Business Level Strategies: After Studying This Chapter, You Will Be Able To

Uploaded by

Copyright:

Available Formats

CHAPTER 5

After studying this chapter, you will be able to:

© The Institute of Chartered Accountants of India

Competitive Analysis (Porter's

Cost Leadership Differentiation

© The Institute of Chartered Accountants of India

5.2 PORTER’S FIVE FORCES MODEL-

© The Institute of Chartered Accountants of India

Figure: Michael Porter’s Five Forces Model of Competition

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

industry actively engage in product differentiation to enhance their products’

© The Institute of Chartered Accountants of India

because of control over distribution channels in India by HUL (Hindustan Uni-

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

5.2.5 Threat of Substitutes

The above discussed five forces together determine an industry’s attractive-

© The Institute of Chartered Accountants of India

5.3 BUSINESS LEVEL STRATEGIES

5.4 MICHAEL PORTER’S GENERIC STRATEGIES

© The Institute of Chartered Accountants of India

strategies allow organizations to gain competitive advantage from three different

Low-Cost products/ser- Differentiated prod-

Figure: Michael Porter’s Generic Strategies

© The Institute of Chartered Accountants of India

5.4.1 Cost Leadership Strategy

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Advantages of Differentiation Strategy

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

5.5 BEST-COST PROVIDER STRATEGY

Figure: The Five Generic Competitive Strategies

© The Institute of Chartered Accountants of India

Distinctive Features of the generic competitive strategies are given below:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

TEST YOUR KNOWLEDGE

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

may concentrate on a particular group of customers, geographic markets, or on

© The Institute of Chartered Accountants of India

• Competitive pressures coming from the attempts of companies in other in-

© The Institute of Chartered Accountants of India

2. Bargaining power of customers: This is another force that influences the

© The Institute of Chartered Accountants of India

You might also like